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Housing Starts Fall, New Mortgage Rules are to Blame

14 August 2012

Just days after Scotiabank said that Canada can expect to see a 10 per cent drop in the housing market over the next few years; while others have predicted a drop as high as 25 per cent. And from looking at the latest housing start stats, which have been down for a number of months, it looks as though that drop might already be here.

According to the Canada Mortgage and Housing Corporation, July saw a huge drop in housing starts,down to 208,500 from June and, as you can see from the graph below, a sharp decrease has been occurring since April.

So why the decline in what was such a hot housing market just a few months ago? Many are pointing to the new mortgage rules, which were announced in June but went into effect on July 9, 2012. These rules make it harder for people to obtain a mortgage; and developers who know this are simply adjusting to the new market.

“We do expect that the impact of tighter mortgage regulations announced in late June will slow housing demand, but the impact on the construction and starts data is unlikely to show up until later in the year,” says David Tulk, chief Canada macro strategist for TD Securities.

But while the Canadian government has imposed those new rules so that we could slow our borrowing and stop getting in over our heads, it’s also going to have a slowing effect on the economy. In fact, if the slowdown continues, most analysts believe that the housing sector will no longer be able to push Canadian gross domestic product the way it has for the past several years.

“The July lower-than-Q2 numbers represent the possibility that housing could fade out of the picture as a positive contributor to quarter-over-quarter GDP in the third quarter and even drag on growth, contingent on how the rest of the quarter shakes out,” says Scotia Capital economists Derek Holt and Dov Zigler.

Despite the fact that starts are down, and have been down for several months, housing prices continue to increase in Canada, particularly in the cities of Toronto and Calgary. Other data from Statistics Canada showed that new home prices rose by 0.2 per cent in June, and that it was the 15th month in a row that prices saw this kind of jump. Prices in Toronto jumped 0.3 per cent while those in Calgary were up 0.05 per cent.

This latest data doesn’t prove that the bubble many had talked about for so long is actually occurring; but it does show that Canada’s hot housing market is starting to cool down. As fewer starts are seen on a month-to-month basis, prices will start to eventually correct themselves. And while it probably won’t be the drastic 25 per cent drop that some predict, a drop of 10 per cent in prices wouldn’t be too far off from what the market currently requires.

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